The DC pension plan for 2010 |
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| Strategic Finance | |
| Written by Paul Williams | |
| Wednesday, 06 January 2010 | |
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Some tips to consider for those looking after corporate pension plans.
Mercer has compiled a “10 for 2010” checklist of New Year resolutions that pension plan sponsors and governors of defined contribution (DC) plans should make to address plan design and investment concerns and help members meet their retirement objectives: 1 – Set or review plan objectives With DC pension plans now positioned as the predominant form of retirement saving in the UK workplace, most employees have become dependent on DC outcomes for their retirement provision. Consider setting or reviewing the expectations of your DC plan and work towards meeting its objectives. Addressing the gap between what current structures will provide and what members might need in retirement will help reduce workforce management issues that will occur in the future if DC outcomes are inadequate to provide comfort in retirement. 2 - Review existing DC structures and options As DC has become the pension provision of choice over DB arrangements, the sophistication and general level of contributions to DC plans has increased. Consider if the current design still works as an effective tool for recruitment and retention of employees when compared to plans of peers organisations. 3 - Review the default investment option It is increasingly important that plan sponsors and trustees review member demographics relative to default investment options. Evaluate the underlying default investment funds – are they “best-in-class”? Consider creating customised default options to provide members with an appropriate level of risk and reasonable underlying investment management. 4 - Confirm that all investment funds in the line-up are appropriate Some funds might take on more risk than is appropriate. Review each fund in the plan and include an up-to-date evaluation of performance, style and risks as well as the overall balance of funds offered to suit the specific member profile. 5 -Communicate your plan’s fund options as a two- or three-tiered structure to increase member understanding. Limited investment knowledge is one of the biggest obstacles facing members in developing a well diversified portfolio. The plan’s current line-up can be communicated as lifecycle funds and core options. Provide members with sufficient choices in an easy-to-understand format that engages them and helps them make better investment decisions. 6 - Take steps to improve member contributions. Targeted communications, automated plan features and persistence have proved effective in getting members on track towards adequate retirement savings. Ensure members have access to all available tools and options to make informed decisions on the adequacy of current savings levels so they are empowered to make educated choices. 7 - Consider plan design for moderate and high earners The proposed tax increases to pension accrual announced in the pre-Budget report will make the attraction of savings through pension arrangements more or less attractive depending on the level of earnings that an employee receives. Consider the current approach and identify if there is a need to introduce alternative methods of workplace savings that might be more tax efficient and/or give better value for employer spend. 8 - Review the security of pension providers With further consolidationof pension providers underway, consider the security of your provider(s) and their commitment to continue to develop their proposition to meet your needs and those of your members. 9 – Improve DC governance practices Much of the communication from the Pensions Regulator last year stressed the need for effective governance of workplace pensions - therefore expect a greater focus on this area in the coming months. Ensure that plans follow good practice in all areas of governance and have defined objectives in this regard. 10 - Get ready for Personal Accounts Despite the extension to the phasing process for full compliance with the employer duties contained in the Pensions Act 2008, many large employers will still be staged into the initial phase of compliance from 2012. Take time to identify those employees who will need auto-enrolling and budget for the increase in contribution costs. Review your plan to ensure it can be used as an auto-enrolment plan and agree the timeframes for any alterations required.
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